Buy-sell life insurance after Connelly: is yours set up right?
Most buy-sell agreements are funded with life insurance, owned either by the company or by the owners on each other. In 2024 the Supreme Court ruled that company-owned policies can raise the value of a deceased owner’s shares for estate tax. If your company owns the policies, your agreement deserves a second look.
By Greg Garone, CEPA® · Published by Morrowgate Private Wealth · Last reviewed October 2026
Company-owned vs owner-owned policies
Prefilled with the numbers from the Connelly case. Change them to yours.At the 40% top federal rate, that could mean up to $924K more estate tax, if the estate is over the federal exemption.
With two owners, either setup takes two policies. The count climbs fast as owners are added: four owners need twelve cross-purchase policies. Age gaps and changes in ownership also make cross-purchase harder to run. Your attorney may suggest another structure entirely.
Simplified illustration of the Connelly ruling. Ignores valuation discounts, state estate tax and how much of the estate is already exempt.
Two brothers and a building supply company
Michael and Thomas Connelly owned Crown C Supply, a building supply company. Michael held 77.18%. The company owned $3.5 million of life insurance on each brother so it could buy back a deceased brother’s shares.
When Michael died, the company used $3 million of the proceeds to buy his shares. His estate valued the company without counting that insurance. The IRS valued the company at $6.86 million, the $3.86 million business plus the $3 million of insurance, which put Michael’s shares at about $5.3 million instead of $3 million.
The IRS assessed $889,914 in additional estate tax. The Supreme Court agreed with the IRS unanimously on June 6, 2024. Read the Supreme Court’s opinion → Read the decision.
Three ways buy-sell funding goes wrong
Sized to the old price
Policies bought when the agreement was signed, never increased as the company grew. Run the gap on the buy-sell page.
The wrong owner on the policy
Company-owned policies now carry the Connelly estate tax issue. Owner-owned policies can drift out of balance as owners age or change.
Death only
Many agreements require a buyout if an owner is disabled, but only death is insured. The buyout then comes out of cash flow.
What usually fixes it
- Coverage re-sized to each owner’s share at today’s value
- A fresh look at who owns the policies: the company, the owners, or another structure
- Disability buyout coverage if the agreement requires a buyout on disability
- An agreement whose price formula and funding match each other
Questions for your attorney
- Who owns our buy-sell policies, and does Connelly affect us?
- If one of us died this year, would the insurance cover the price our agreement uses?
- What would it take to change our structure, and what would it cost?
Buy-sell life insurance questions
How is life insurance used in a buy-sell agreement?
When an owner dies, the policy pays out and the money buys that owner’s share from their estate. The family gets cash, the surviving owners keep the company, and no one has to borrow or sell to make it happen.
What did Connelly v. United States decide?
In June 2024 the Supreme Court unanimously held that when a company receives life insurance to buy back a deceased owner’s shares, the proceeds count toward the company’s value for federal estate tax, and the company’s obligation to buy the shares does not offset them.
Is a cross-purchase agreement better after Connelly?
It avoids the Connelly problem because the owners, not the company, own the policies. But it means more policies as owners are added, uneven premiums when owners differ in age or health, and its own complications when ownership changes. Some owners use other structures entirely. This is a decision for your attorney.
How much life insurance should fund a buy-sell agreement?
Enough to buy each owner’s share at today’s value, under the price formula your agreement actually uses. If the company has grown since the policies were bought, they’re probably short.
Bring your policies and your agreement
A 30-minute video call with Morrowgate Private Wealth’s Greg Garone, CEPA®, wherever you are in the U.S. We’ll check whether your coverage matches today’s value and how Connelly affects your setup, then work with your attorney on any changes.
Greg doesn’t sell insurance. When coverage needs to change, we refer you to a licensed insurance professional and coordinate the rest.
Go deeper on WealthPlannerPro: Life insurance needs calculator · Federal estate tax calculator